The tea bag test

Shell Canada's president and CEO on how we might best tackle challenges to our energy supply by using new technology, fuel alternatives and promoting conservation.

In a speech given on Oct. 4 to the Canadian Business Leadership Forum in Toronto, Shell Canada president and chief executive officer Clive Mather outlined a series of startlingly honest, constructive insights into how we might best tackle challenges to our energy supply. These included making better use of techniques and technologies available for extracting hydrocarbons, promoting conservation and fuel efficiency and developing fuel alternatives. The highlights are excerpted below; the full text is available at

Leadership is always challenging, but when things are going well, leadership can be downright exhilarating. I have only been in Canada for a couple of years, and during that time our industry has experienced record production and profitability. We have also seen Canada's oilsands emerge as a major energy resource. Shell Canada itself has enjoyed new natural gas discoveries, growth in existing operations and developed projects for future growth in environmental management, as well as in oilsands, natural gas, sulphur and new fuels. I am the first to admit that it is easier to steer a ship in full sail with a destination that is in clear view.

Of course, when things are going less well, leadership can be lonely and stressful. Yet, that is when leadership is forged and tested–in the storms and uncertainties of life. Indeed, as the title of this address suggests, leadership is like a tea bag–only really tested when in hot water.

Have you ever been in hot water? I have. For me, hot water was working for Shell in South Africa during the dark days of apartheid. In spite of intense criticism from many quarters, we stuck it out, believing that it was better to work for change within the country than abandon our employees and all that we had established there. Happily, that situation turned out well–better, in fact, than the subsequent Brent Spar incident, when Shell decided to dispose of a storage platform in the deep ocean. Although technically the right environmental solution, the Brent Spar disposal showed us that we had a lot to learn in our interaction with stakeholders. In many ways, Brent Spar was the catalyst for change throughout the Shell Group.

However, I don't want to talk about me but about our collective leadership in the face of a real and difficult challenge, which I will simply call the energy challenge.

Let us examine this more closely.

The world's population is growing at an average rate of just more than 1% per year and is expected to reach almost eight billion within 20 years.

Nations such as China, Indonesia, India and other developing countries have legitimate aspirations for economic development. This does not necessarily mean SUVs in every garage but certainly includes some personal mobility and some personal climate control.

Added together, this translates into massive demand for energy, perhaps 50% more than today, perhaps 100% more. In our industry, where a new refinery could take eight to 10 years from initial discussions to startup, we have to plan ahead, and all our models predict strong growth.

So, we can readily express the energy challenge with three A's: availability, affordability and acceptability.

Or have we reached 'peak oil'? I believe it will be available, and the peak theory is just that. Look at hydrocarbons, which are the primary source for almost all of the world's current energy. Today, conventional oil and gas represents only 1% to 2% of total world hydrocarbons. By conventional, I mean oil and natural gas generally trapped underground by hydrodynamic processes (the movement of fluids), that is produced by drilling underground and allowing the oil or natural gas to flow naturally to the surface through wells and pipes.

A further 5% of hydrocarbons comes from unconventional oil and gas sources like oilsands in northern Alberta, as well as coal-bed methane and shale gas. Oilsands are sand, clay and rock material containing bitumen, which is a heavy, viscous oil. Unconventional natural-gas sources include basin-centred gas, shale gas, tight gas and coal-bed methane. While there may be large volumes in place, the recovery factor so far has been low.

Coal is a yet more massive global resource, representing 30% or more of the world's hydrocarbons. Coal deposits are found in many parts of the world, including North America, South Africa, Australia, Russia and China.

And finally, gas hydrates, which account for at least 60% of hydrocarbon resources. Gas hydrates are a compound formed by the union of gas and water. Research suggests that the largest occurrences of gas hydrates may lie in nearly horizontal layers several hundred metres beneath the sea floor of continental slopes.

So we have barely scratched the surface of the hydrocarbons accessible to us today and, with each new decade, we will find new technical solutions for the release of more resources. That has been the history of our industry for the past 100 years and will be for the next 100.

Well, that depends on whom you ask. Certainly, today's crude price hovering around US$60 per barrel is a great deal more than the $11 per barrel we saw only a few years ago. There are a couple of reasons why the price has risen so far and so fast.

First, cheap, conventional resources are proving harder to find, so exploration and development costs are higher each year. Compare, for example, the approximately US$20+ cost of one barrel of synthetic oil from the Athabasca oilsands with the US$2 or so for a barrel from Saudi Arabia's enormous reservoirs.

Secondly, security of supply, at least in the short term, has become a significant concern or even a political mantra. Hurricanes, wars, political activism, terrorism and organized crime have all played a part in fostering this concern so that the risk premium in the overall price is substantial. There is even talk of US$100 per barrel of crude. It would have been a joke a few years ago, but now, who knows?

Much as we hate paying more at the pump for our gasoline, pay we do. For many of us, the alternatives are worse or simply not available. Of course, the impact on economies around the world varies. The oil-rich countries such as Norway, Venezuela, Russia, and the Middle East, are enjoying something of a bonanza, while oil importers like the United States and much of Europe are keeping a close, somewhat worried eye on prices, although there is no evidence yet of a negative impact on the economy or consumption. For developing countries in Africa and Asia, high oil prices are yet more bad news alongside debt burden, corruption and underinvestment.

The reality is that the markets are doing their job and, at today's prices, both privately owned multinational oil companies and state-owned oil companies are able to undertake massive reinvestments in production. For example, Shell Canada's 2006 capital investment program of $2.7 billion is the largest in the company's history. We decided a couple of months ago to proceed with a 100,000-barrels-per-day (bpd) expansion of our Athabasca Oil Sands Project (AOSP), in spite of a significant increase in capital intensity due to heated markets for labour, materials and equipment. Pending regulatory approvals and a final investment decision, the expansion will help move the AOSP toward our goal of 550,000 bpd mined bitumen production. Our exploration and development business has accelerated its basin-centred gas program and is investing in new infrastructure to handle increased natural gas volumes in the foothills of Alberta. And, we are looking into the feasibility of expanding our refining capacity for the first time since 1984, when we commissioned Shell's Scotford refinery near Edmonton–Canada's last new refinery.

Take away the risk premium and all this reinvestment will serve to increase supply and should, therefore, reduce prices–but only time will tell. Pessimists, conspiracy theorists and hedge funds are all betting on prices remaining high. As for the people working in Calgary's oilpatch, they still remember the famous bumper stickers of the 1980s–“Please, God, grant me another oil boom and this time I promise not to p… it away.”

Well, this is the tricky A–the real test of leadership, the hot water for the tea bag. And I do mean hot water, because there is ample evidence that the oceans are warming up, as we experience more hurricanes, melting ice caps and a loss of biodiversity. Carbon dioxide (CO¸) and other greenhouse-gas emissions are major contributors to worrying environmental issues in every part of the globe. This is directly linked to mankind's appetite for energy, combined with the inefficient ways it is used. And there are other issues, such as land use, land-use change and forestry, which are releasing huge quantities of CO¸ through the destruction of the world's great forests to make way for agriculture, industry and housing.

Energy choice and consumption is at the core of the problem. As we have already seen, the appetite for energy is undiminished–demand is growing in spite of higher prices. As for energy use, we are still relying on hydrocarbons and the legacy of inefficient energy infrastructure commissioned in the middle of the last century. We waste energy and are slow to exploit technological change. Most of all, we as individuals are reluctant to embrace behavioural change.

So, what can we do about all this? There are perhaps two options: we can wring our hands in despair and await the destructive impact of nature as she copes with rising CO¸ levels (the “nature bats last” scenario described by author and naturalist Robert M. Pyle ), or we can start taking practical steps to slow the increase of CO¸ emissions, then stabilize and finally reduce the levels. We can come up with new fuels, invest in greater efficiency and adopt different behaviours.

New fuels get the most publicity. We hear a lot about renewable energy such as wind, biomass, cellulosic ethanol, hydrogen and solar. Solar now includes the so-called CIS thin-film technology, or second-generation CIS technology, that uses copper indium diselenide, eliminating the use of expensive silicon. However, the reality is that it will take a long time for these alternatives to penetrate the market sufficiently to make a significant difference. Alternative energy will also require huge investments, especially in radically new infrastructure. At current rates of return, the economic incentive for the industry to make such investments is low or nonexistent, so we cannot expect the market to stimulate the necessary cash flow. It is going to take government subsidies driven by public pressure; hence my belief renewable energy is a long-term contributor to the solution, not a short-term fix.

I do believe we can achieve much greater efficiency because there is a wide range of technologies available now that can make a huge difference–gasification, carbon capture and sequestration, low-energy appliances, insulation, clean coal technology, mass transportation, engine design, high-performance fuels and so on. In fact, we have already seen some amazing mileage records. Admittedly, the 10,000 miles per gallon of gasoline at the 2003 Shell Eco-marathon was something of a gimmick because of the type of vehicle and the racetrack. But the recent round-the-world record set by two Australians at 62.7 mpg was definitely the real thing. The couple drove a standard-production Volkswagen Golf 18,000 miles across 25 countries in every extreme of temperature, climate and terrain in 78 days using only 287 gallons of Shell diesel fuel.

Shell Canada constantly seeks to improve the energy efficiency of our operations. For example, in a warm-water loop at our Sarnia refinery, we extract heat from water already circulating in various parts of the refinery. This design recovers enough energy to light almost four million 100-watt light bulbs continuously for 12 days and reduces projected greenhouse-gas emissions by 10,000 tonnes.

We are working on a project to capture CO¸ from our oilsands production and sequester it in aging oilfields. Not only can this technology enhance oil recovery, but it can also help significantly reduce greenhouse gases. Although CO¸ capture and sequestration is not new, what is new is technology to capture CO¸ at major plants like Shell's Scotford Upgrader and the concept of a common infrastructure that would enable other companies to join the project and sequester their CO¸ emissions. This is a bold and exciting project, but I believe only the first step toward a partnership between industry and government to advance recovery and sequestration in Canada.

Shell also has a significant stake in the Canadian company Iogen Energy, which is producing ethanol from agricultural residues such as straw. The first pilot plant is already in production in Ottawa, and a commercial-scale facility is being planned. The waste straw itself produces no net carbon and the overall carbon lifecycle emissions are reduced by 90%, giving a healthy boost to the environment.

With the tools and technology that we have commercially available today, we can easily halve the need for transportation fuels. The same goes for heating, lighting and energy conversion–all without sacrificing our lifestyle.

Changing behaviours could add so much more. Consider that the average U.S. citizen consumes about 26 barrels of oil per year compared with 13 barrels per year in western Europe. That staggering difference highlights the possibilities for improvement and the impact of the relative fiscal policies in the two continents. We have to encourage conservation, recycling, video conferencing versus travel (a safer option, too, in light of terrorist threats to air travel), turning the thermostat up or down, sharing cars, using public transportation and so on.

Behavioural changes will take education, awareness and lots of good advice. Above all, they will require leadership–real leadership–at various levels. I'm talking about political, corporate and personal leadership. Politically, we shall need frameworks for tax and other economic incentives to do the right things plus, perhaps, economic consequences for simply maintaining the status quo–a carrot-and-stick approach, if you will. Businesses will have to work with the various levels of government, bringing to the table their technical and technological expertise. Most of all, change will require personal examples and role models–aye, there's the rub–like you and me.

Where are we today? Well, the bad news is that it was as far back as 1965 when the first serious report on climate change landed on the desk of the then U.S. president Johnson. So, not much has happened over the past 40 years.

The good news is that hardly a day passes that climate change or its impact does not feature in the popular media. General awareness of the issue is far higher than it was a generation or even a decade ago. With the current levels of cash, tools and technology at our disposal, it is a good time to take action.

And that brings us back to the tea bag test. Are we up to it? We must treat energy for what it is–a precious resource, capable of being converted into many useful applications–chemicals, medicines and fuels. But, we must consume it carefully with due consideration for its side effects as well as its cost.